Enforcement Actions By The Sec - Securities Regulation

Enforcement Actions by the SEC

1. Process

   1. Investigations

      1. The process begins with an informal or preliminary investigation which simply entails asking questions of the parties involved without issuing subpoenas or seeking to compel testimony.

         • An initial investigation is nonpublic unless the Commission orders it to be public, but this is rare.

      2. If the staff's concerns are not satisfied by the information provided, it can seek the Commission's authority for a formal investigation.

         • Such authority is embodies in what is known as a Formal Order of Investigation issued by the Commission.

           • To obtain a formal order, the staff must persuade the commissioners that there is reason to believe that a violation has occurred.

             • BUT this has been delegated to the Director of Enforcement (who has delegated it to Deputy Directors)

         • At this point, staff has the power to issue subpoenas nationwide against any person or records significant to the investigation.

           • If a person refuses to comply, the SEC staff must apply to the federal district court to enforce the subpoena.

             • An SEC subpoena can be judicially enforced without the staff having to prove probable cause that the securities laws have been violated.

             • BUT a subpoena is not enforced if the investigation is not for a proper purpose, the information sought is not relevant to that purpose, the SEC already possesses the information, or the administrative procedures for issuing the subpoena have not been followed.

           • The target of an SEC investigation is not entitled to prior notice when a subpoena is directed to a third party.

           • So long as the staff is acting in good faith, its discretion to determine who will be required to testify will not be questioned.

           • Also the fruits of an investigation can be shared with the Justice Department. See United States v. Stringer (pg. 805)

      3. Once the staff has completed its investigation, it must return to the Commission for permission to institute any enforcement action.

         • If the SEC thinks it has a case, the Enforcement staff sends a Wells Notice before any action is taken and reputational damage occurs.

           • This provides notice and an opportunity to submit written statement, referred to as a Wells Submission.

             • The attorney must prepare the submission without knowing the precise nature of the staff's case and without access to all the evidence available to the staff.

2. Procedures

   1. Options for the Commission when it believes some form of action is necessary

      1. Cautionary Letter

         • This is the least sever option and is simply a letter advising the subjects of the investigation that their practices or conduct raises serious questions under the securities laws or constitutes a minor offense

           • The cautionary letter is nonpublic and infrequently used.

      2. Report of Investigation per § 21(a) of the Exchange Act

         • If the Commission believes it is desirable to have wider publicity to what its investigation has unearthed, it will publish a Report of Investigation.

         • This is the case even though no further action will be taken against the subjects of the investigation.

      3. Forward the information

         • To the appropriate SRO

         • To the Justice Department

      4. Commence Administrative Proceeding - ANY resulting sanction must be "in the public interest."

         • Stop Order proceedings (§ 8 of the '33 Act)

         • Administrative Disciplinary Proceedings (§ 15 of the '34 Act)

         • Collection of Administrative Penalties (§ 21B of the '34 Act)

         • Cease-and-Desist Proceeding (§ 21C of the '34 Act)

         • Permanent or Temporary Suspension of Trading (§ 12 of the '34 Act)

      5. Commence Action in Federal District Court

         • Seek and Injunction

         • Seek Officer or Director Bars re Public Companies

         • Civil Money Penalties

         • Ancillary Relief (Disgorgement, Appointment of Receiver/Counsel, etc.

   2. FACTORS re how bad the SEC is going to whack you - § 21(a) Report of Investigation re Seaboard Corporation (pg. 808)

      1. (1) What is the nature of the misconduct involved?

      2. (2) How did the misconduct arise?

      3. (3) Where in the organization did the misconduct occur?

      4. (4) How long did the misconduct last?

      5. (5) How much harm has the misconduct inflicted upon investors and other corporate constituencies?

      6. (6) How was the misconduct detected and who uncovered it?

      7. (7) How long after the discovery of the misconduct did it take to implement an effective response?

      8. (8) What steps did the company take upon learning of the misconduct?

         • Are persons responsible for any misconduct still with the company?

         • Did the company promptly, completely and effectively disclose the existence of the misconduct to the public, to regulators, and to self-regulators?

         • Did the company cooperate completely with appropriate regulatory and law enforcement bodies?

      9. (9) What processes did the company follow to resolve many of these issues and ferret out necessary information?

      10. (10) Did the company commit to learn the truth, fully and expeditiously?

      11. (11) Did the company promptly make available to the staff the results of its review and provide sufficient documentation reflecting its response to the situation?

      12. (12) What assurances are there that the conduct is unlikely to recur?

      13. (13) Is the company the same company in which the misconduct occurred, or has it changed through a merger or bankruptcy reorganization?

3. Remedies

   1. SEC

      1. § 21(d) of the '34 Act/§ 20(b) of the '33 Act - Injunction

         • § 21(d) of the '34 Act empowers the Commission to sue in federal district court to seek a permanent or temporary injunction "whenever it shall appear to the Commission that any person is engaged or about to engage in acts or practices constituting a violation of any provision" of rules or regulations of the '34 Act or the rules of the SROs.

           • "[T]his language seems to require a finding of 'likelihood' or 'propensity' to engage in future violations. . . . Our recent decisions have emphasized . . . the need for the SEC to go beyond the mere facts of past violations and demonstrate a realistic likelihood of recurrence." SEC v. Commonwealth Chemical Securities, Inc. (pg. 824)

         • § 20(b) of the '33 Act contains a similar provision.

         • EFFECTS of an injunction:

           • Injunctions must be disclosed in all documents filed with the SEC

           • Professionals may be temporarily suspended from practicing before the Commission if they have been permanently enjoined for a violation of the securities laws.

           • The Commission under § 15(b)(4) may sanction any broker or dealer that has been temporarily or permanently enjoined for violating the securities laws.

             • The sanction under this provision can include suspension for up to 12 months.

           • An issuer is barred from using Regulation A or Rule 505 if the issuer or any one of its officers, directors, partners, or beneficial owners of 10% of a class of equity securities has in the past five years been temporarily or permanently enjoined for violating the securities laws.

      2. § 8 of the '33 Act - Refusal or Stop Order Proceedings

         • This section allows the Commission to use its refusal and stop order powers to address defects in a filed registration statement.

      3. § 21A - Civil Penalties for Insider Trading

         • § 21A(3) provides for penalties for control persons

      4. § 21B of the '34 Act - Civil Money Penalties and Disgorgement

         • This is in an Administrative Proceedings

         • This is to broker-dealers and clearing agencies.

         • BUT § 20(d) of the '33 Act and § 21(d)(3) of the '34 Act authorize courts to impose civil penalties and disgorgement orders against those who violate the provisions or regulations under those Acts.

      5. § 20(d) of the '33 Act/§ 21(d)(3) of the '34 Act - Civil Money Penalties and Disgorgement

         • This is in a court proceeding.

         • Authorize courts to impose civil penalties and disgorgement orders against those who violate the provisions or regulations under those Acts.

           • Three Tiers

             • Penalties begin at $5,000 per violation for minor offenses and go all the way up to $100,000 for a natural person and $500,000 for other violators for fraudulent and deceitful conduct that results in a substantial loss to others.

           • Disgorgement

             • Courts can substitute a penalty equal to the gross amount the defendant gained through the violation when such amount is greater than the statutorily prescribed amount.

               • Disgorgement need only be a reasonable approximation of the profits causally connected to the violation. SEC v. First City Financial Corp.

      6. § 21C of the '34 Act - Cease-and-Desist Orders

         • This is an administrative remedy (administrative proceeding)

         • § 21C allows for the order to enjoin the "causing [of] such violation and any future violation of the same provision, rule, or regulation."

           • The language of § 21C contemplates a "classic negligence standard" in using the phrase "an act or omission the person knew or should have known would contribute to such violation."

         • The standard for issuing a cease-and-desist order is that there be "some likelihood of future violation based on proof of some continuing or threatened conduct by [the respondent] creating an increased likelihood of future violations." KPMG, LLC v. SEC (pg. 816)

         • When made, a "cease-and-desist order should be 'sufficiently clear and precise to avoid raising serious questions as to their meaning and application.'" KPMG, LLC v. SEC (pg. 816)

         • Report of the Committee on banking, Housing, and Urban Affairs (pp. 813-14)

           • In general, a cease-and-desist order is an administrative remedy that directs a person to refrain from engaging in conduct or a practice which violates the laws.

           • A violation of a cease-and-desist order may be punishable by a court-imposed civil penalty in addition to a mandatory injunction...